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Whose Dollars Are These Anyway? Foundations Rethink Their Model

Foundations represent more than $1 trillion in invested assets, yet are required to give away only 5% of their assets to charity every year. What are they doing with the other 95%?
Three cups of cinnamon dulce flavored coffee, the Wall Street Journal and CNBC. Barbara VanScoy’s morning routine is mostly what you might expect for someone who manages an investment portfolio. She’s even got a Bloomberg Terminal set up in her home office.
“I’m typically reading a lot of materials from various sources,” says VanScoy. “In fixed income, I’m exploring municipal bonds and mortgage-backed securities so I have to know what’s going on in various markets.”
“Fixed income” is the investor term for treasury bonds, state or local government bonds, corporate bonds or securities backed by mortgages, small business loans or other forms of debt. The underlying borrowers generally pay a fixed amount per month or quarter, which is where the term comes from.
One day in mid-May, VanScoy had some cash in her portfolio that she was looking to move into a fixed-income investment. Like all portfolio managers, she has a certain risk tolerance and an expectation of higher returns for riskier investments. But VanScoy doesn’t work for a Wall Street firm, where she would merely be looking for the highest possible return for the relative level of risk for any investment. She happens to work for the F.B. Heron Foundation.
By federal law, private foundations such as Heron must spend at least five percent of their endowments every year on grants and operations — while the other 95 percent gets invested in stocks, fixed income investments and other assets. The income from those investments is what pays for foundations’ grantmaking and operations.
Across the U.S., around 120,000 private foundations currently hold more than a trillion dollars in their investment portfolios. But foundations have traditionally outsourced their investment portfolio management to professional investment firms — including many Wall Street firms.
In 2019, VanScoy became the first in-house fixed-income portfolio manager for the F.B. Heron Foundation, founded in 1992 with a mission to support low-income communities. Heron was the first, and one of the few, foundations to look at its investment portfolio not just as a way to fund its grants and operations, but as a way to achieve its mission as well. Hiring VanScoy was just one in a series of steps it took to build on that vision for how to invest its endowment.
After scanning the market that day in mid-May, VanScoy found an investment she liked — a secondary issuance that originated from the Michigan Housing Authority. “Secondary” means it’s a purchase from another investor, while primary issuances are purchased from the originator.
“I really like state [municipal bond] housing issues because it’s one of the best ways to really target racial inequality and racial equity through racial wealth and homeownership creation,” VanScoy says. “I looked at a few issuances, saw Michigan, liked the demographics of borrowers, and the performance so far.”
So she wrote up a memo and sent it along with her research to CEO Dana Bezerra for discussion and final approval. Instead of calling some outside firm to request that they purchase the investment on the foundation’s behalf, VanScoy herself made the purchase later that same day.
“The way our portfolio is structured, we are always looking for something that’s deeper in community with our grantees, deeper in mission, coupled with maximizing financial performance,” VanScoy says. “It’s always trying to climb the [mission] ladder.”
The Trouble With the Philanthropic Model
Philanthropy has long been a means for the powerful and wealthy to put the lipstick of civic duty on the pigs of inequality and exploitation of people and planet. These ultra-rich benefactors have left indelible marks on cities, both in how they made their money as well as how they gave it away.
Most famously, Andrew Carnegie’s steel factories spewed tons of carbon into the skies above Pittsburgh and other newly industrialized cities while his management fought with labor unions at every turn. After selling his steel company to J.P. Morgan for $480 million in 1901 (the equivalent of $15.2 billion in 2021), Carnegie turned around and gave away most of that fortune before he died, building public libraries across the country and funding other well-intentioned endeavors.
Carnegie literally wrote the book on making as much as you can in order to give away as much as you can — well, not a book but a two-part series of magazine articles, called “The Gospel of Wealth.” It called on the rich to use their wealth to improve society. It would inspire future generations of the wealthy to follow in his footsteps, from Henry Ford to multiple generations of Rockefellers.
Today’s Ford Foundation, Rockefeller Foundation and other legacy foundations no longer give away profits accrued mostly from their founders’ original businesses. But they mostly operate on the same basic model. They seek out today the highest possible financial returns from whatever they own in stocks, bonds or other investments in order to fund the largest possible volume of grants tomorrow. Even foundations with living founders, such as the Gates Foundation, operate mostly on that model.
Over time, critics have pointed out the harmful and sometimes hypocritical features of the traditional foundation model. A foundation that grants money to groups pushing for criminal justice reform might also invest in private prisons. Another foundation funding scientific research into more efficient and affordable renewable energy technology might also invest in fossil fuels. A foundation funding tenant organizing on the grants side might also have investments in real estate where property managers routinely harass or evict tenants.
“I think there’s growing momentum among foundations to be looking at using the full 100 percent of their endowments toward their missions,” says Matt Onek, CEO of Mission Investors Exchange, a network of foundations across the country that support “impact investing,” the practice of making investments that seek a measurable social return in addition to their financial return.
“Not all foundations are going to jump right away to 100 percent or commit to 100 percent,” says Onek. “But there’s increasing recognition that the other 95 percent is a critical way to have an impact toward your mission and align with your values.”

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